Understanding Offshore Banking – A Hands-On Primer
If you have never banked outside the United States, offshore banking may seem mysterious and shadowy. It is not, and the following will illuminate the subject.
"Offshore" banking refers to a banking relationship established by a person or company resident in the United States with a bank located outside the United States. For the most part an offshore bank is very much like a U.S. bank. Offshore banks are subject to much the same due diligence, know-your-client and investment regulations as the U.S. banks. Offshore banks are distinguished by providing a different level of service, by offering different merchant and investment products, and by being more obscure. For ease of reference, let's look at three major geographic banking centers: Europe, Caribbean and Latin America and Asia.
Banking in Europe
Until a few years ago, Americans had an easy time establishing a bank account anywhere in Europe. Swiss and other European bankers actively looked for business in the U.S. and fought for clients. One could literally walk into any bank on Bahnhofstrasse in Zurich and have an account an hour later. The banks would solemnly swear to the new client that the information provided by the client was sacred and neither the client's identity nor any account information would ever be provided to anyone outside the bank.
That has all changed with the UBS scandal and the increased scrutiny from the U. S. Treasury and the SEC. To maintain its business operations in the United States, UBS was forced to disclose the identity of its U.S. clients to the U.S. Treasury. The Treasury provided the information to the IRS for cross-checking against undisclosed foreign bank accounts. Those with undisclosed accounts were encouraged to come forward under an IRS amnesty program. The IRS recently rolled out the third installment of its offshore disclosure amnesty program, citing over $4.5 billion in collections from the first two installments.
The IRS is now actively investigating about a dozen more Swiss banks. Rumors abound that a global settlement between the U.S. Treasury and all the Swiss banks is in the works. The Swiss banks are expected to disclose the identity of all U.S. clients. The disclosure of UBS' clients and the decision by the Swiss parliament to allow the disclosure has been a huge blow to Swiss banking. The one great difference between a Swiss bank and all others banks was perception, i.e., the perception that your money would disappear down a deep hole below Bahnhofstrasse and no one but you could find it. That perception has been destroyed.
An aside: Why would a private Swiss bank with no branches in the U.S. cooperate with the U.S. Treasury? Cooperation stems from the unspoken threat that failure to cooperate will result in the bank getting cut off from being able to transfer U.S. dollar denominated funds (all such transfers come through the U.S.).
Cooperation with the tax authorities is easy for a foreign bank. It simply requires new clients to provide it with IRS Form W-9, which authorizes the bank to provide client information to the U.S. tax authorities if requested. Because most clients who establish banking relationships with foreign banks are not tax cheats, it is rarely a problem.
The bigger problem for European banks is the SEC, and the reason why most will not accept U.S. clients. The SEC has been on a war path to require registration and SEC compliance by any bank that does business in the U.S. Because banking U.S. clients may, theoretically, be seen as doing business in the U.S. (even though there are no branches, employees or transactions in the U.S.), most European banks simply refuse to accept U.S. clients.
There are several banks left in Europe that will accept business from the United States. These banks either have an SEC-compliant division for their U.S. clients, or have taken the position that their operations do not require SEC compliance even if some clients are from the U.S.
So what is it like to bank with a Swiss (or similar) bank? It has its pros and cons.
Opening an account is an easy and straight-forward process. Once the bank has some basic information about the new client, it will prepare the application for the client. The client will simply need to sign it, provide a notarized copy of his passport and recent utility bill and return to the bank. The account is usually opened a week later and a relationship is established between the private banker and the client through an introductory phone call.
A personal visit to the bank is not required, but the client is always welcome to visit. Those lucky enough to visit will often share stories with their friends of how they descended into the world of James Bond and were treated to an espresso and a croissant.
Because very few European banks deal with U.S. clients, those that do can afford to be picky. Many have increased their minimum required account balances to either $500,000 or $1 million.
European bankers are very formal and operate strictly by the book. They will conduct extensive due diligence on any new client, including running Google and Lexis searches on prospective clients. Clients that are involved in serious litigation, have pending criminal charges are in the adult-type business will be turned away. Clients who pass master will enter banking heaven.
The level of service provided by European private banks is unmatched. You never go through a calling center in India. You have your own private banker, who knows you and your needs. You can always reach your banker by email or cell phone; all transactions are through him alone.
European private banks are not geared toward retail banking relationships. No check book will be issued (money is deposited and withdrawn by wire transfer), no merchant relationship established, and eyebrows will be raised if the client makes frequent deposits and withdrawals. The accounts are viewed as investment accounts and are treated as such.
Investments in the account can either be controlled by the client (what is called an advisory mandate) or by the bank (a discretionary mandate). An advisory mandate is cheaper, ranging from 0.2% to 0.5% in annual fees. Client can invest in cash, money market funds, mutual funds or specific stocks, bonds, etc. A discretionary mandate usually runs from 1.0% to 1.25% and all the investment decisions are made by the bank, subject to the criteria set by the client. Consequently, European private banks function more like investment advisory firms (think Morgan Stanley, Merrill Lynch, etc).
Clients constantly ask whether deposits with European private banks are insured in a manner similar to FDIC insurance. Most deposits at European private banks are not government-insured. There are two reasons for this.
First, deposit insurance is not needed. The last time a Swiss bank failed was in 1976 and all the depositors were made whole by the Swiss government. Deposit insurance (FDIC) was established during the Great Depression when hundreds of banks in the U.S. failed. During that same time few banks failed in Switzerland, so the need for government insurance never developed.
Second, private banks function as investment advisors and most of the money held at such banks is "off balance sheet." The bank is the custodian of the client's funds, not the owner. A bank failure would not affect off balance sheet assets.
Caribbean and Latin American Banks
Banks in the Caribbean and Latin America are more accepting of U.S. clients. They are not as put off by the SEC (for whatever reason) and will accept U.S. clients who provide a W-9.
These banks are capable of establishing retail bank accounts. These are accounts focused on banking business activities, not investment accounts.
It is difficult, however, to open an account in a Caribbean or Latin American bank. While the due diligence is almost identical to that of European banks, the process takes much, much longer. A Swiss bank will usually open an account within a week of receiving paperwork; a Caribbean bank may take four to six weeks. The paperwork is often completed incorrectly – unlike European banks, Caribbean banks will not prepare the paperwork for client's signature. Either the client or the lawyer will have to prepare the forms, and deciphering the forms of a Caribbean bank is not an easy task.
There is often not a specific banker assigned to the client, and the client may end up talking to different people each time he calls the bank. The service is not nearly as quick and helpful as it is at a European bank.
Caribbean and Latin American banks are not insured by their governments and investment choices and currency denominations are more limited than at European banks. The fee structure is similar.
Over the years there have been a number of Caribbean and Latin American banks that have failed, with depositors losing money.
We generally avoid Caribbean and Latin American banks unless the client needs a retail banking relationship, does not pass the more rigorous due diligence process in Europe or does not have the minimum necessary to open an account in Europe.
There are two primary banking jurisdictions in Asia: Hong Kong and Singapore.
Similar to Europe there are very few banks left in these jurisdictions that will bank U.S. clients. Banks in these jurisdictions are inundated with funds coming out of mainland China and can afford to say no to the potentially problematic U.S. clients. The few banks that are left will establish a relationship that is more comparable to the European private banking model, including the fee structure, investments, and the high minimum.
The big difference is the requirement imposed on Hong Kong and Singapore banks by local law to have the client sign the account opening paperwork in person. Most clients are not willing to travel to Hong Kong just to open a bank account.
The world of offshore banking is experiencing a transition phase. Gone are the days when banks would eagerly open an account of any size for any client. The uncertainty of tax and SEC compliance has weeded out most of the players, and the few who remain call the shots.
Clients who do meet the criteria for banking in Switzerland, Liechtenstein, Nevis, Panama, Hong Kong, Singapore or a similar jurisdiction will usually find an exceptionally service-oriented relationship conducted in a very formal setting.
We have opened hundreds of offshore bank accounts for our clients. We have great relationships with various offshore banks and would be happy to assist you with any of your offshore banking needs.
Estate Planning 101
Jan 24, 2012 by Jacob Stein
Location: Education Foundation - Sacramento
All About Trusts
Jan 30, 2012 by Jacob Stein
Location: Education Foundation - Orange County
A Lawyer's Guide to Asset Protection Planning
Feb 17, 2012 by Jacob Stein
Location: Century City